According to the dividend discount model, if d be the dividend per share in perpetuity of a company and g its expected growth rate, what would the share price of the company be. ‘r’ is the discount rate.

According to the dividend discount model, if d be the dividend per share in perpetuity of a company and g its expected growth rate, what would the share price of the company be. ‘r’ is the discount rate.
A . https://riskprep.com/images/stories/questions/123.01.a.png
B . https://riskprep.com/images/stories/questions/123.01.c.png
C . https://riskprep.com/images/stories/questions/123.01.d.png
D . https://riskprep.com/images/stories/questions/123.01.b.png

View Answer

Answer: A

Explanation:

According to the dividend discount model, the spot share prices represent the present value of all the future cash flows from the stock. If held till perpetuity, this becomes an annuity equal to the dividend, growing at its expected growth rate. Therefore Choice ‘a’ is the correct answer. Choice ‘c’ would represent the total market cap, and not the value per share that the question asks.